E-Malt.com News article: World: SABMiller and Diageo expected to report stagnated or even lower first-quarter alcohol sales

The heads of two of the UK’s biggest companies have a drinks problem – how to find growth, The Financial Times reported on October 12.

Alan Clark at SABMiller, the brewer, and Ivan Menezes of Diageo, the world’s largest spirits group, are both expected to report that alcohol sales in the last quarter stagnated – or even fell – when they give updates to the market this week.

A cocktail of factors over the past year, including weakness in emerging markets, unfavourable currency movements but also falling consumption in the competitive markets of North America and Europe, have held back growth.

Diageo, the producer of Johnnie Walker Scotch whisky, Smirnoff vodka and Guinness beer, suffered a 9 per cent drop in sales to £10.3 bln in the year to the end of June and an 11 per cent fall in pre-tax profits to £2.7 bln – its weakest result in three years.

At SABMiller, net sales fell 1 per cent in the year to the end of March to $26.7 bln, while pre-tax profits rose 3 per cent to $4.8 bln.

Given that the two men took the helm of their respective companies only last year from long-serving predecessors, the weaker trading means the jury is still out on their performances.

Thomas Russo, partner at US fund manager, Gardner Russo & Gardner, who has 6 per cent of his portfolio invested in SABMiller, says it is too soon to judge. “[Mr Clark] took over in very turbulent times in an organisation that hadn’t had time to say a proper goodbye to its former CEO,” he says.

The former chief executive, Graham Mackay, died of cancer last year. He pioneered an acquisition spree that transformed the former South African Breweries into the world’s second-largest beer group, with brands including Peroni, Miller Lite, Grolsch and Foster’s in Australia.

But when Mr Clark made a written takeover approach to the family controlled Heineken last month, the advance ended up being leaked, earning the group a public rebuff from the Dutch brewer. “A clumsy approach,” said Tristan van Strien, analyst at Deutsche Bank.

It also made SABMiller appear on the defensive after speculation that the London-based brewer wanted to enlarge itself to deter a potential takeover bid from rival Anheuser-Busch InBev, the Belgian-Brazilian owner of Budweiser and Stella Artois.

Mr Clark told analysts last week there was “absolutely no truth” that the approach to Heineken had been defensive and that M&A was a “core component” of the group’s growth strategy.

Donny Kranson, fund manager at New-York based Vontobel Asset Management, which has roughly $1 bln invested in SABMiller said: “I’m not sure why there was a formal approach given that it is known that the Heineken family wants to retain control of the company.

“Alan was handed a great operation and he doesn’t need to do anything transformative. He just needs to get SAB to execute in its markets and I think he is doing a great job of that.”

Mr Clark last week also outlined a strategy to boost sales in mature markets by broadening beer’s appeal to women and family gatherings.

The group would also focus more on the soft drinks business, which accounts for 20 per cent of volumes and which was the brewer’s fastest-growing business in its last financial year with organic sales up 6 per cent.

SABMiller is one of Coca-Cola’s bottlers and the renewed focus could indicate a desire to acquire more Coca-Cola bottling rights, especially in South Africa, according to Trevor Stirling, analyst at Bernstein Research.

Shares in SABMiller have outperformed the FTSE 100 by 10 per cent in the past 12 months, partly on bid speculation and the promise of a $500 mln cost-cutting programme. Diageo, however, has underperformed by 10 per cent.

Mr Menezes, the Indian-born head, is suffering from a hangover induced, in part, by a number of acquisitions made by his predecessor, Paul Walsh.

In China, the group’s baijiu spirit business was hit by the government’s anti-extravagance drive while in Turkey, marketing restrictions led to a decline in sales of its raki spirit. In India, taking control of United Spirits has been a source of frustration.

Other problems include a tax rise in Kenya, while in the US, Smirnoff vodka has been challenged by the popularity of American whiskey.

Though Diageo is less exposed to emerging markets than SABMiller – 45 per cent of sales against the latter’s 75 per cent – its results have also been hit by weakening currencies against sterling.

While most of these setbacks can be put down to bad luck, others cannot. Analysts cite problems in Nigeria, where Diageo failed to cut prices of its beers quickly enough as self-inflicted, serving to undermine confidence about operations in other emerging markets,

Mr Kranson, who also has a stake in Diageo, says of Mr Menezes first year: “Ivan wasn’t dealt the best hand in the world. He’s having to put out fires he didn’t light.”

Analysts add that the longer-term growth potential for both companies is good. Mr Russo cites SABMiller local operations in Africa as “impressive” and Diageo’s “fabulous portfolio” of brands.

But in the short term, both chief executives will be hoping for a pick-me-up.

Alan Clark, also 55, was right-hand man to the late Graham Mackay, who ran SABMiller for 12 years. He was Mr Mackay’s anointed successor, though was bounced into the top job a few months earlier than his July 2013 scheduled start, in April, because of Mr Mackay’s illness.

The South African-born Mr Clark is a former clinical psychologist whose academic past is reflected in an understated but highly analytical and disciplined manner.

He has worked at SABMiller for the past 24 years, which has given him a broad range of experience, covering operations – the job he most enjoyed was running a brewery – and marketing. He ran the soft drinks business in the early 2000s and the tough European division in the teeth of the recession.

Mr Clark has made it clear he will focus on organic growth while continuing with acquisitions. He has also prioritised the unglamorous plumbing of group structure. SABMiller is present in more countries than any of the world’s big four brewers and Mr Clark wants to integrate common processes, such as IT and procurement, while delivering $500m of annual cost savings.

The 55-year-old chief executive of Diageo is a “sleeves rolled-up merchant of premium brands”, according to Thomas Russo, investor and partner at US fund manager, Gardner Russo & Gardner.

He believes that Indian-born Ivan Menezes’ “non-traditional background” will be “very valuable” to Diageo as emerging markets become an increasingly important part of the mix in its drinks cabinet.

Mr Menezes studied economics and business management in India before taking an MBA at the US Kellogg School of Management. He has been at Diageo for 17 years, serving as chief operating officer immediately before taking over, after Paul Walsh’s 13-year tenure, in July 2013.

Outgoing and convivial, he also has a reputation as a hard taskmaster. He has put the accent on “accelerating execution” and has spent much of his first year tackling the company’s top-heavy structure by taking out a layer of regional managers to get better insight into individual markets and speed up decision-making.


15 October, 2014